Microsoft's Dominance Under Attack

As 2004 comes to a close, Microsoft faces small but growing threats around the edges of its desktop monopoly. None can yet strike at the heart of its dominance, but the issues are serious enough that you can bet Microsoft's top brains are focused on them.

The real trouble is brewing in client operating systems and browsers, key parts of the client operating environment that Microsoft relies on for the bulk of its revenues and profits, and to drive business to its other products. After listening to Microsoft's earnings call last month, financial analysts at Credit Suisse estimate Microsoft has lost 2 percent to 3 percent of its global PC operating system market share. To the investment bank's analysts, it means Microsoft's future sales will consistently underperform growth in PC unit sales.

They attribute the loss primarily to global software piracy and the growth of Linux in Asia. If Credit Suisse is right, and that's a big if, it would be a blow to Microsoft's plan of slow but steady progress to claim what remains of the last 7 percent of global desktop share.

Gartner research supports the Credit Suisse contention that piracy is a significant problem, especially in areas of the world that Microsoft must rely on for future growth. In Russia, for example, Gartner says 80 percent to 85 percent of new PCs ship with Windows, but most of the remainder end up with pirated versions. Count both licensed and pirated copies, and Windows is present on at least 97 percent of PCs in Russia, Gartner says.

Microsoft recently took a major blow in Europe when the U.K.'s government procurement watchdog agency, the Office of Government Commerce, released a report calling Linux a viable desktop alternative for the majority of government users.

The browser is another area where a recent third-party study shows trouble for Microsoft. The latest numbers from Web analytics provider WebSideStory put the market share of Microsoft Internet Explorer at 92.9 percent—still dominant. But it's a 0.8 percentage point slip since the firm's Sept. 10 survey and a 2.6 percentage point drop since June.

The main beneficiary is the Firefox browser, which hit a 3 percent market share even before its 1.0 release in November.

For several reasons, Microsoft may be badly out of position to combat these problems. A major reason is the Longhorn operating system, because, for now, the official Microsoft line is that Internet Explorer development is tied to Longhorn. That approach gives competitors a year to build momentum on both the desktop and browser fronts before Microsoft even releases a beta.

Microsoft has a lot of share to lose before it is in serious trouble. But so did Novell NetWare and Netscape Navigator. When IT markets tip, they can tip with dizzying speed, making a minor shift in market share a huge problem.

Of course the common thread in the Novell and Netscape examples was Microsoft. It is already moving to cut off the threats—with the Windows XP Starter Editions, security improvements in the Windows XP version of IE via Service Pack 2 and the renewed public attacks against Linux in Microsoft CEO Steve Ballmer's recent executive e-mail. 2005 should be an interesting year.